Friday, January 21, 2011

Shorting HO crack spread (Short MarHO and Long MarCL)!

It has been a while since I have blogged about a position that I was taking at work. But today I find myself with a little extra time to blog about a trade that I noticed today that looked good to me on a contrarion play. With the Cold weather on the East coast /HO has been very strong and with the relative weakness in crude the Heating Oil Crack spread (HO contract *42 - CL Contract) has in the last two weeks run up from 14 to as high as $22.50 this afternoon.

Looking at the chart below the move looks very parabolic and this is confirmed by the 9 day RSI with a reading of 87.31:

Now the above chart does not explain the whole picture, we should also look at this on a seasonal basis historically. So the next chart below is shows the time frame from Jan to Feb:

In the above chart you are looking at how this crack has performed on a seasonal basis for the past 4 years. The dotted blue line is the average of all the years displayed, and the black line is the current year of this crackspread. On the seasonal it does not show todays move, but I have added some text to around where we are on this spread. See the first chart to see todays movement.

Although wheather is cold on the east coast I am not convinced that the recent move is sustainable. And from a contrarion perspective this is a great fade play. So today I shorted this crack spread with 5 lots at an average price of $21.76. I would love to sink my teeth into this one but I want to give it some room in case it continues to move higher.

To me there is about $1-$3 of upside risk with about $5-$10 of downside reward. If this did continue moving higher I am willing to get short up to 15 lots and would add around $23 and $25, but would stop out  at $25.50 and re-evaluate.


  1. Explain the *42 and how the spread works.

  2. Well the 42 multiple on the HO contract is to get it in terms of bbls. There are 42 gallons in a bbl. So when you see crude tradeing at say $90/bbl and HO trading at 2.65/gal, the equivalent per bbl for HO would be 2.65*42=$111.30. To cacluate the crack spread you take the $111.30 minus the 90 and come up with $21.30.

    So you make money as this spread narrows towards 0. It can happen by crude trading up and HO trading down...They can both trade down but HO trades down more relative to crude...They can both trade higher with crude trading higher relative to HO...HO could go down and Crude stay the same...or Crude could go up with HO stays the same.

    I think I covered all the ways this thing can make money.

  3. Got it, thank you. It makes it easier to understand now. It's hard to follow or evaluate a trade you don't understand.

  4. Sorry guys...I am not very timely at updating these posts. But the Monday after I put this on I did more research and all the cold weather on the east coast and Europe...seems like I was a little early, so I took the opportunity to spin out of this position.